U.S. Treasury Secretary Janet Yellen recently visited China, reopening dialogue between the two countries. The purpose of the discussion was to minimize dangerous miscommunications and ease tensions.
Mixed Reception from Investors
While this development is a positive step towards resolving the deteriorating relationship, it did little to allay investors’ concerns. Several pending developments have the potential to further inflame tensions between the two largest economies.
Shifting Focus to Diversification
Yellen’s visit signaled a shift in the Biden Administration’s approach towards China. Instead of emphasizing decoupling, she highlighted efforts to diversify critical supply chains. Yellen stressed that both the U.S. and China can thrive within the global economy and emphasized the importance of collaboration in certain areas.
Rethinking the Link Between U.S. and China
Although many acknowledge that complete decoupling is virtually impossible, actions taken by the U.S. indicate a serious reevaluation of the relationship. Restrictions on China’s access to critical technology, such as semiconductors, are being imposed by the U.S. and its allies.
Struggles and Measures in China’s Economy
Chinese leader Xi Jinping has expressed interest in attracting foreign investors as their economy faces challenges. However, the U.S. is considering additional restrictions on investments in China, which was raised as a concern by Chinese officials during Yellen’s visit.
Anticipated Restrictions and Executive Order
Restrictions may include limiting Chinese companies’ access to U.S. cloud-computing services and closing loopholes in semiconductor export controls. Analysts from Beacon Policy Advisors suggest that an executive order on outbound investments into China could be issued this month, with a narrow focus initially. Wrangling within the Administration is ongoing to ensure that restrictions related to artificial intelligence investments do not have unintended consequences.
It is likely that the final executive order will target specific transactions, with restrictions on the use of cloud-computing services intended to broadly hinder China’s development of artificial intelligence, according to Beacon analysts.
China’s Export Controls Raise Concerns for Investors
Investors are growing increasingly concerned about the implications of Chinese export controls and the potential impact on the Biden administration’s de-risking plan. Analysts at asset manager RockCreek have issued a note cautioning investors that the US government’s limits on outbound investments to China, even if initially aimed at national security, may be viewed by China as an economic threat.
The key question now is how Beijing will respond. In a recent move, China banned the export of gallium and germanium, essential materials in the production of semiconductors, missiles, and solar cells. This can be seen as a direct response to US restrictions that have limited China’s access to advanced technology and chip exports. Experts believe that this ban could be the first step towards a complete export ban, underscoring China’s significant influence in the global supply chain.
As China’s export controls escalate, other countries are already searching for alternative sources of rare earth minerals. Vietnam is well-positioned to fill this gap, although it only has approximately half of China’s estimated reserves. However, this shift may not completely alleviate investor concerns regarding the geopolitical risks arising from US-China relations.
Adding to these concerns, the Select Committee on the Chinese Communist Party is scheduled to hold a hearing on Thursday to address the growing risks faced by American companies operating in China. Last month, US companies were warned of potential penalties for their regular business activities in light of China’s new counterespionage laws.
Overall, the relationship between the US and China continues to present significant risks for investors. The full extent of these risks remains to be seen.